Tuesday, October 25, 2005

Limit Federal Spending Now!

Recently while at the store, my 8-year-old son was miffed when I told him I didn’t have money to buy something he wanted. He looked at the items in the cart and asked how I could have money for all of that stuff, but not for the thing he wanted. For the umpteenth time, I tried to give him a 30-second course in family economics. He seemed to understand mentally, but he obviously still couldn’t grasp the concept emotionally.

Howard Headlee, president of the Utah Bankers Association, recently wrote an article calling for better financial education for our youth. He noted that despite the increasing sophistication of American youth, most “high school graduates are totally unprepared to manage their personal finances responsibly.” They don’t understand that paying the minimum credit card payment could leave them paying for a pizza or a CD months or even years later.

Years ago I received a bracing education in real world finances when I worked in the loan department of a bank. I was assigned to work with people that were delinquent on their credit payments. From working with these people and working with youth over the years, I believe that the main source of money problems is a failure to mentally and emotionally understand two concepts: the limited size of the pot of available funds, and priority of potential expenditures. It is amazing how fast financial problems evaporate when people properly understand these issues.

This principle extends to government as well. Former Congressman Dick Armey (R-TX) once said, “Three groups spend other people’s money: children, thieves, politicians. All three need supervision.” Over the past five years our Congress has been spending like they have no adult supervision. There seems to be a lack of understanding of the limited amount of available funds and how to prioritize expenditures. If politicians run out of revenue, they simply mandate more debt. Everything people (and politicians) want becomes a top priority.

I have discussed this problem in these previous posts: 1, 2, 3, 4. Pete du Pont, former governor of Delaware and chairman of the National Center for Policy Analysis notes here that, “The real annual growth rate of federal government outlays is nearly at its highest modern percentage.” Higher than during the Reagan years. Much higher than during the Clinton years. Even higher than during the Johnson years. And only a small portion of that is for homeland security. It’s mainly due to growth in social programs and pork barrel projects.

Interestingly, it is the Bush tax cuts that have kept this increased spending from swamping the economy. These tax cuts have made for a robust economy that has resulted in a 14% increase in tax revenue. But there is a limit to how much profligate spending the economy can handle.

Brendan Miniter says here that while cutting congressional pork is important and necessary, what we really need is “a coherent and broad-based plan to shrink the size of government by controlling spending.” Du Pont thinks that the problem has reached the point that we need “a constitutional amendment to hold the growth of federal spending to specific percentages of revenue unless there is a supermajority override by both houses of Congress.” Such a constitutional requirement would force the plan Mr. Miniter desires.

Du Pont notes the success experienced by Delaware, which passed such an amendment to its state constitution 25 years ago limiting government spending to 98% of revenue, with the remaining 2% going into a rainy day fund to cover things like disaster recovery. The result has been 25 years of healthy government and balanced budgets. In 1992 Colorado amended its constitution to limit the growth in government spending to inflation plus population growth. The result has been one of the highest rates of growth in GDP and personal income in the nation. These amendments have effectively controlled government spending and forced politicians and constituents to prioritize needs and wants.

I am leaning toward agreeing with Mr. du Pont. It looks like our federal government spending system needs additional checks and balances. But it’s incredibly difficult to pass a constitutional amendment. Our founders intended this to be the case. Federal politicians would have to vote to tie their own hands: “Stop me before I spend again!” State politicians have to vote to possibly cut their own states’ access to the federal trough. They also might be justifiably leery that Congress would simply mandate that the states cover desired programs, thus indirectly increasing states’ budgetary needs without impacting the federal budget.

Mr. du Pont suggests that even if the amendment failed, it would engender an important national discussion about “How big, how expensive and how fiscally generous to industries and local communities [and I would add, to individuals] should America's national government be?” I believe that it is essential that as a nation we engage in this discussion – and the sooner, the better.